ADVA Optical Networking : 2021 9M Report

LETTER TO SHAREHOLDERS

Dear shareholders and business associates,

This nine-month announcement sees us once again publishing very good business results. In the third quarter, we fully met the goals we set ourselves and even exceeded them in some areas. Despite the ongoing crisis around the supply chain of semiconductor components, which in many ways worsened in recent months, we again sequentially increased our revenues in Q3 2021 and achieved an excellent level of EUR 151.8 million. I want to thank our entire team, especially our employees in purchasing, production and logistics, for making this excellent result possible despite all the challenges. The pro forma EBIT margin was 8.6% and thus also at a very good level. We increased our liquidity again by EUR 15.5 million to EUR 100.5 million and therefore increased net cash to EUR 20.6 million. This gives us a lot of financial leeway and positions us well in these unusual times.

Good demand, material shortages and innovation

The efforts of governments, authorities and companies worldwide to advance the digitization of ecosystems continue to create an innovative environment and a very high demand for optical networking technologies. Our order backlog is at a record level and demand for our products and solutions continues to develop positively.

We currently see risks for our business almost exclusively in maintaining a functioning supply chain. Recently, the material bottlenecks, especially for semiconductor products, have worsened. Just a few months ago, we assumed that the end of the third quarter of 2021 would be the preliminary peak of the crisis. But according to current assessments, we expect that the coming quarters will also be strongly influenced by the semiconductor crisis. This will demand a great deal of flexibility and creativity on our part.

On the other hand, our development projects are progressing well, and we are keeping to the schedule of our most important roadmap items. The semiconductor crisis, however, is also leaving its mark on product development. Our development teams regularly face the challenge of adapting the designs of individual products to more readily available components. Those teams are also making an important contribution to ensuring our short-, medium- and long-term delivery capacity.

Business transformation

We're also making good progress in implementing the strategic transformation of our business model that we

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announced in March. This strategy is essentially based on the following three pillars:

• Disproportionate growth in security-relevant networks outside the classic network operator infrastructure
• Increasing sales contributions from software and services
• New markets and cost optimization through verticalization

Our success in the research and education market, as well as the government sector, continued in the past quarter. On September 21, we announced that RedIRIS is using our network technology to create a robust, high-performance research and education network in Spain. The new nationwide infrastructure connects Spanish universities and research institutions across the country and enables teachers and scientists to share enormous amounts of data and use bandwidth-intensive applications.

For our software product Ensemble Connector, we're expanding our marketing activities for SmartWAN functionality. SmartWAN is an innovative alternative for the booming market for SD-WAN solutions.

And in the area of verticalization, we have made good progress in the past quarter with the further development of our optical transmitter and receiver modules, which we will be launching on the market in the coming year.

Business combination with ADTRAN

While ADVA is executing very well on its vision and business plan, we've recently taken a new step in the direction of strategic partnerships and alliances. On August 30, we announced our plans for a business combination with ADTRAN to create a global leader in scaled fiber optic communications technology. The merger combines ADTRAN's global leadership role in residential access solutions (fiber-to-the-home) and subscriber management with our global leadership position in solutions for data center interconnect, business access (Carrier Ethernet access and fiber-to-the- building), metro WDM, and network synchronization.

This merger creates a market and innovation leader who can optimally address the new requirements that are emerging around the edge of the network. In doing so, the transaction creates significant long-term value for all stakeholders in both companies, as it further enhances our ability to serve as a trusted supplier to customers around the world with a broader range of products. The combined company will offer a comprehensive product portfolio to provide homes, businesses and 5G infrastructure with scalable, secure and assured fiber optic connectivity paired with cloud-managed

Wi-Fi connectivity. We are in the early stages of an unprecedented investment cycle in fiber optic expansion, particularly in the US and Europe, driven by the goal of delivering high-speed connectivity to all homes, businesses and future 5G infrastructure. The combined company portfolio positions us better to participate as a market and innovation leader in this important investment cycle in fiber optic access networks and the expansion of data transmission in the so- called edge and metro environment.

Outlook

The macro environment for our industry continues to be very good on the demand side. In many regions of the world, investments in the digitization of ecosystems are increasing, and the expansion of fiber optic communication infrastructure is making unstoppable progress. When selecting suppliers and partners, network operators are now paying more attention to the country of origin of the technology they need, and the increasing security requirements in communication networks are having a long-term impact on the global competitive landscape. This deglobalization trend benefits us and strengthens our competitive position, especially in Europe and the USA. The only cause for concern is the continued supply crisis in the field of semiconductors. We are currently entering into long-term commitments with our suppliers and working closely with our partners and customers to ensure that business processes run as smoothly as possible.

Our balance sheet is strong, and our financial flexibility is growing. The pandemic and the semiconductor crisis will be with us well beyond the remainder of the financial year. However, we are confident that we will achieve our annual targets if demand continues to be strong and our ability to deliver can be maintained.

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Our industry provides the basis for a digital future and the maintenance of communication and economic processes. Digitization is one of the most important topics in political and economic discussion. As an innovative manufacturer that enjoys the trust of a global and loyal customer base, we're well-positioned to harness emerging opportunities. We'll continue to tackle supply chain challenges and invest all our energy and creativity in innovative solutions for the benefit of our customers, shareholders and employees.

October 20, 2021

Brian Protiva

Chief executive officer

IFRS FINANCIAL HIGHLIGHTS 9M 2021

Income statement

(in thousands of EUR,
except earnings per share and ratios)	Q3 2021	Q3 2020	Change	9M 2021	9M 2020	Change
Revenues	151,777	146,676	3%	445,604	424,386	5%
Pro forma operating income *)	13,012	11,053	18%	40,287	19,489	107%
Pro forma operating margin in %	8.6%	7.5%	1,1pp	9.0%	4.6%	4.4pp
Operating income	9,496	9,768	-3%	34,105	14,388	137%
Operating margin in %	6.3%	6.7%	-0,4pp	7.7%	3.4%	4.3pp
Net income	18,478	6,671	177%	41,707	7,065	490%
Diluted earnings per share in EUR	0.36	0.13	177%	0.81	0.14	479%

Cash flow statement

(in thousands of EUR)
	Q3 2021	Q3 2020	Change	9M 2021	9M 2020	Change
Cash flow from operating activities	28,399	25,065	13%	87,527	74,181	18%
Cash flow from investing activities	-15,071	-13,859	9%	-44,526	-45,800	-3%

Balance sheet and financial ratios

(in thousands of EUR)		Sep. 30,20	Dec. 31,2
		21	020	Change
Liabilities to banks		55,259	62,621	-12%
Lease liabilities according to IFRS		24,644	27,805	-11%
Financial debt		79,903	90,426	-12%
Cash and cash equivalents		100,513	64,881	55%
Net cash/(debt) *)		20,610	-25,545	181%
Leverage (twelve months rolling) *)		0,5x	0.7x	-29%
Net working capital *)		130,794	129,853	1%
Working capital ratio in % *)		22.0%	23.0%	1.0pp
Equity		315,325	263,218	20%
Equity ratio in %		56.7%	52.6%	4.1pp
Capital Employed *)		384.250	373,941	3%
ROCE in % *)		11.9%	7.3%	4.6pp

Employees

(at period end)	Jun. 30,2021	Dec. 31,2020	Change
	1,944	1,870	4%

*) The four key performance indicators as well as other ratios are defined in the glossary at the end of this document.

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RESULTS OF OPERATIONS, NET ASSETS AND FINANCIAL POSITION

Business development and operational performance

Revenue development and revenues by region

Revenues represent one of the four key performance indicators for ADVA. The group's revenues in 9M 2021 amounted to EUR 445.6 million and were EUR 21.2 million or 5.0% above revenues of EUR 424.4 million in 9M 2020. Compared to revenues of EUR 149.4 million in Q2 2021, revenues in Q3 2021 increased slightly by 1.6% to EUR 151.8 million. When comparing Q3 2021 to the previous quarter, the increase in revenues is driven by a pickup in demand from communication service providers (CSPs) in the Americas and APAC.

In 9M 2021, EMEA (Europe, Middle East and Africa) was once again the most significant sales region, followed by the Americas and Asia-Pacific.Year-on-year, sales in EMEA increased significantly by 26.5% to EUR 280.7 million in 9M 2021 compared to EUR 221.9 million in 9M 2020. ADVA is traditionally very strong in Europe with a broad network of partners, with results driven by a loyal customer base.

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Revenues in the Americas decreased year-on-year by 22.1% from EUR 162.6 million in 9M 2020 to EUR 126.6 million in 9M 2021, caused by temporary softness with a few customers in the first half year of 2021. In the Asia-Pacific region, sales also slightly declined in 9M 2021 to EUR 38.3 million from EUR 39.9 million in 9M 2020. The region is typically predominated by project-based business, leading to greater fluctuations in individual quarters. APAC revenues for Q3 increased substantially when compared to the previous quarter.

9M 2021	9M 2020
445.6	424.4

8.6%9.4%

28.4%

38.3%

52.3%

63.0%

Americas		EMEA		APAC